October 2, 2019

Beware of pre-dispute arbitration agreements


Arbitration refers to a non-judicial process where a neutral person is selected to make a binding resolution of a legal dispute. When the parties voluntarily agree to arbitrate a dispute after it arises, arbitration can provide a relatively low cost and quick way to resolve the disputes. However, more and more companies are forcing arbitration agreements on employees and consumers as a condition of taking a job or providing goods and services. These pre-dispute arbitration agreements are often included in the fine print of employee handbooks, contracts for cell phones, credit cards and other consumer goods, investment and retirement account agreements, contracts to build or remodel a home, and even admission packets for nursing homes, to name just a few examples.

Many times, these pre-dispute arbitration agreements are used to shorten time limits for bringing a claim, limit legal remedies and procedural safeguards, and stack the deck against consumers and employees. In addition, there is a bias that results from the fact that companies are “repeat players” in arbitration, typically having many claims brought against them over time, whereas individual consumers and employees only have a single claim. If an arbitrator or arbitration company does not routinely provide favorable results, the company can simply change its agreement to specify another arbitrator for future disputes that will provide favorable results. There is no accountability because arbitration decisions are conducted in private, rather than in open court, and there is no appeal or other review of arbitration decisions. Academic studies have shown that employees and consumers are less likely to prevail in arbitration than in court, and when they do prevail, they do not recover as much in damages as they would in court.

In the past, courts viewed pre-dispute arbitration agreements with suspicion and often declined to enforce them, primarily because they were thought to violate the constitutional rights of access to courts and trial by jury. However, in 1925 the U.S. Congress adopted the Federal Arbitration Act, which required courts to enforce most arbitration agreements to the same extent they would enforce any other contract. Since the 1980s, the U.S. Supreme Court has taken an increasingly proarbitration stance, seeming to give preferred treatment to arbitration agreements out of concern about caseloads in certain federal districts around the country. As a result, an employee or consumer who enters a pre-dispute arbitration agreement should assume that it will be enforced.

To protect yourself and your family, be aware of these pre-dispute arbitration agreements, and ask if they can be eliminated. Some companies would rather have your business than risk losing you as a customer for the sake of arbitration. If a dispute arises later and you want to arbitrate, there is nothing that prevents you and the company from agreeing to arbitration after the dispute arises. If the pre-dispute arbitration cannot be eliminated, and you want to go ahead with the transaction anyway, at least you have been warned.

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